For this analysis, we have considered the forward PE (price-to-earnings) multiple due to greater visibility in Jack in the Box’s (JACK) earnings. The forward PE multiple is calculated by dividing JACK’s current stock price by its estimated earnings for the next four quarters.
JACK’s PE multiple
The better-than-expected fiscal 2Q17 earnings, as well as the news of retaining Morgan Stanley to evaluate potential alternatives for Qdoba, which has been a drag on JACK’s top line, appears to have increased investors’ confidence, JACK’s stock price, and its PE multiple. On May 18, 2017, JACK was trading at a PE multiple of 21.6x compared to 21.2x before the announcement of its fiscal 2Q16 earnings.
From the above graph, we can see that JACK is trading below its peers’ median PE values. The business model adopted by the company does not allow the company to expand aggressively.
Also, compared to its peers, JACK’s margins are at the lower end, and the company has been struggling with its same-store sales growth of late. These metrics have led the company to trade at a lower valuation multiple that its peers. On the same day, its peers McDonald’s (MCD), Wendy’s (WEN), and Restaurant Brands International (QSR) were trading at PE multiples of 22.5x, 28.7x, and 31.7x, respectively.
For the next four quarters, analysts are expecting JACK to post EPS growth of 9.4%. The company’s current stock price might have factored in this EPS growth. If the company posts earnings lower than analysts’ estimates, the selling pressure can lower JACK’s stock price and its PE multiple.
You can mitigate these company-specific risks by investing in the iShares US Consumer Services ETF (IYC), which has invested 11% of its investments in restaurant companies.
Next, we’ll look at analysts’ target price and their recommendations.